Inflation-watching is the name of the game this week, with investors ready to digest the latest indicators in attempting to size-up just when that long-awaited rate cut from the Fed may finally arrive. The PPI data has been dished up first, with the figures showing a hotter than expected read on the wholesale front. April PPI was 0.5% m/m, higher than the 0.3% rise expected. However, the overshoot in headline PPI was somewhat tempered by the revision down for the March data to -0.1%, which explains why the USD and bond yields were unable to maintain their initial post-PPI release gains.
However, we are not done yet with inflation figures this week. The main event is still to come, in the form of April’s CPI figures, which will hold more weight as far as the Fed is concerned when assessing how long to stay put at the current interest rate level. April’s CPI is expected to have eased from 3.5% to 3.4% (on a year-on-year basis), however if the PPI data is any sort of prelude, it wouldn’t be surprising to see consumer prices (CPI) also ticking higher again. Inflation has proven to be uncooperative by its nature, and any move north rather than south in the direction of inflation could throw a spanner in the works regarding expectations for some interest rate relief occurring by September.
In short, a higher CPI print could pose a hurdle for risk assets, while conversely a lower result would add to hopes that at least one interest rate cut will arrive before year-end, if not more (and could therefore be a positive event for risk assets). Following the downward revision to March’s PPI data, markets will also be on the lookout for any similar tweaking of the CPI numbers too.
The tepid response of the USD and treasury yields to the PPI data enabled the gold price to make a mild ascent. Gold was seen trading around the $2356 level during Asian trading hours on Wednesday, below resistance levels at $2365 and $2372, while support lies at $2341 and $2327. Gold is in consolidation mode just above $2350 but for the moment the precious metal is just lacking the catalyst needed to make a break higher towards $2400. A weaker CPI result could help its cause. On the flip side, the gold price is susceptible to a slide should inflation data come in on the hotter side of expectations.
In FX, the DXY (Dollar Index) is clinging to the 105 level. The near-term fate of the greenback probably depends on how much if at all the upcoming CPI print reshapes the currently expected rate cutting timeline. Elsewhere, the oil price remains subdued despite ceasefire talks stalling (between Israel and Hamas), with energy markets concerned about possible excess US capacity and the demand side effects of interest rates remaining elevated for longer. For WTI crude, support is at $76.60, with resistance at $79.90.
Looking ahead, in addition to CPI we also have US retails sales and the US Empire State Manufacturing Index due for release. So, the upshot is that there will be plenty of macro figures floating around this week which have the potential to shift the needle when it comes to the expected rate cutting timeline from the Fed.
